Debt Ceiling Update Memo

At noon today, the Senate passed the “Budget Control Act of 2011” (S 365).  Passed in the House by a vote of 269-161, Republicans voted 174-66 while Democrats were divided 95-95.  The debt limit plan cleared the Senate by a vote of 74-26, and President Obama has signed it into law. 

The debt limit agreement includes both previously suggested concepts as well as new ideas, primarily an enforcement mechanism added to drive lawmakers to enact budget cuts by the end of the year.  In the “Budget Control Act of 2011,” the current $14.3 trillion debt ceiling on federal borrowing would be increased by $2.1-$2.4 trillion.  The increase would come in two phases: the debt limit would be immediately increased by $900 billion, while a second increase of $1.2-$1.5 trillion would be available by early next year.  The size of the second increase would be determined by a new, Congressional joint committee to curtail debt growth.  If Congress enacts $1.5 trillion in savings for fiscal years 2012-2021, the debt limit would be increased by $1.5 trillion next year.  Conversely, if savings enacted for fiscal years 2012-2021 are less that $1.5 trillion, the debt limit increase would be $1.2 trillion. 

Spending cuts will provide an immediate reduction in the deficit.  This will be achieved by placing statutory caps on discretionary appropriations for the fiscal years 2012-2021.  The savings would amount to $935 billion or $756 billion, depending on different estimates provided by the Congressional Budget Office.  For 2012 and 2013, caps for security and non-security accounts would be segregated, meaning that domestic programs would not be could not be accessed to provide more security spending.  However, for 2014-2021, the caps for security and non-security spending would not be separated.  If members of Congress do not adhere to the aforementioned discretionary spending caps, automatic spending cuts will take effect once the Congress adjourns for the year.  

Additionally, the “Budget Control Act of 2011” (S 365), requires both the House and the Senate to vote on a proposed balanced-budget amendment to the Constitution by the end of the year.  If both chambers of Congress adopt this amendment and it is ratified by the states, the second debt limit increase would automatically be $1.5 trillion.